Exchange rate sensitivity of the Canadian bilateral inpayments and outpayments

The traditional way of assessing the impact of currency depreciation on the trade balance has been to estimate the import and export demand elasticities using aggregate trade data and check the Marshall-Lerner condition. To reduce the aggregation bias, the trend now is to estimate these elasticities on a bilateral basis. However, due to lack of data on import and export prices at bilateral level, the new models relate import or export values directly to the exchange rate. In this paper, we estimate such models between Canada and her 20 largest trading partners using recent advances in time-series modeling. The results reveal that in many cases while export values (inpayments) are not sensitive to the exchange rate, import values (outpayments) are.